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Growth in asset-backed pension funding set to continue in 2014

Nearly £2bn of asset-backed contributions were made in 2013, and this is likely to increase in 2014, according to KPMG survey

9 January 2014

Asset-backed contributions (ABCs) for pension schemes (where a sponsoring employer uses business assets to secure cash which is paid to the pension scheme) saw a significant increase during 2013, and the rate of new implementations is gathering pace according to the 2014 asset-backed funding survey from the Pensions team at KPMG in the UK.

Twenty three ABCs were made in 2013, nearly doubling the total number in the market, while the total value of transactions grew by nearly £2bn to over £7bn. This acceleration in the rate of new ABCs reflects the continuing challenges facing pension scheme sponsors, and these are expected to drive further growth in 2014.

Material growth predicted in 2014

Based on market conditions and continued high interest from employers, KPMG predicts that the rate of new ABCs will increase further in the next year.

David Fripp, Pensions Partner at KPMG in the UK, said:

“Growth in the use of ABCs during 2013 was largely driven by challenging market conditions over recent years. These conditions have persisted into 2014, and we’re finding that increasing numbers of companies and trustees are turning to ABCs to fund part or all of their deficits.”

The main drivers for the uplift in ABCs predicted by KPMG are:

Continued pressure for companies to fund large deficits as quickly as possible: with low current levels of gilt yields many fear that this will lead to trapped surplus in the future as yields return to normal levels.

Peace of mind: the security inherent in an ABC can provide a more attractive alternative for Trustees to a traditional recovery plan.

Meeting other objectives: companies are increasingly using ABCs to finance other goals such as merging pension schemes or facilitating insurance or de-risking.

The Pensions Regulator published guidance on ABCs during November 2013. This brings more clarity to the Regulator’s thinking on these structures, which, according to KPMG, is likely to contribute to growth in 2014. David Fripp explains:

“The Regulator’s guidance highlights a number of risks for trustees to consider when assessing an ABC proposal, and largely reflects existing best practice. However, while the guidance may not lead to significant changes in practice, it provides a helpful framework for companies and trustee boards to assess ABC proposals which may make the implementation process more straightforward, perhaps encouraging more companies and trustees to consider these structures.”

Use of ABCs in 2013

Twenty-three ABCs have been made in the past year with a total value of nearly £2bn. This is a significant increase in activity compared to last year, when seven new structures were put in place. Prior to the start of 2013, a total of 29 ABCs had been made in the market, so this year has seen that almost double.

ABCs are increasingly being used by smaller schemes, with the average deficit met falling to around £80m (compared to c. £100m over 2011/12). Seven of the new structures over 2012/3 had a value of £25m or less, whereas previously only three structures of this size had been implemented.

Property remains the most popular asset for ABCs, although 2013 has seen a significant increase in the use of intra-group loans. This can allow companies to use ABCs even where there are restrictions over the transfer of assets or where no obvious tangible asset exists. Additional security can instead be provided through recourse to an overseas parent or sister company that may otherwise not be required to support the scheme.

What is an asset backed contribution?

An asset backed contribution involves a sponsoring employer using business assets to secure cash which is paid to the pension scheme.

This is achieved by transferring the assets into a separate entity, typically a Scottish Limited Partnership (SLP). Typically the assets used will generate income such as rent or royalties although this is not essential and we have been seen companies making use of other assets such as brands or income receivables. The vehicle then uses the assets to deliver payments to the scheme, which could be a regular income stream and/or lump sums. Typically the entity will be bankruptcy-remote from the sponsoring employer, providing the trustees with additional security if the employer becomes insolvent.

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